The Globalization Bubble

Writing at Project Syndicate, Daniel Gros puts forward the idea that globalization is ending:

BRUSSELS – China has just announced that last year, for the first time since it began opening up its economy to the world at the end of the 1970s, exports declined on an annual basis. And that is not all; in value terms, global trade declined in 2015. The obvious question is why.
While global trade also fell in 2009, the explanation was obvious: The world was experiencing a sharp contraction in GDP at the time. Last year, however, the world economy grew by a respectable 3%. Moreover, trade barriers have not risen significantly anywhere, and transport costs are falling, owing to the sharp decline in oil prices.

Tellingly, the so-called Baltic Dry Index, which measures the cost of chartering the large ships that carry most long-distance trade, has fallen to an all-time low. This indicates that markets do not expect a recovery, meaning that the data from 2015 could herald a new age of slowing trade. The obvious conclusion is that the once-irresistible forces of globalization are losing steam.
The situation in China is telling. In recent decades, as it became the world’s leading trading economy, China transformed the global trading system. Now the value of both imports and exports have fallen, though the former have declined more, owing to the collapse of global commodity prices.

From there he continues with an analysis of the relation between changes in commodity prices and globalization.

I don’t think he quite has the story right. What I suspect is the case is that there was never quite as much foreign trade as we thought there might be. The comparison I would make is with the housing bubble.

Demand comes in two flavors: demand on the part of end users and demand on the part of resellers. When end users and resellers are competitors, as was the case with a big chunk of the housing industry, it produces some eccentric effects. One of those effects is convincing people that end user demand could be a lot higher than it actually is.

IMO at the height of the housing bubble not only were there an enormous number of flippers buying houses but there were a lot of ordinary people buying too much house because they thought the value would go up and they could always sell.

Something like that has been going on in commodities. The Chinese have been buying enormous amounts of most commodities in a credit-fueled spending binge and they’ve been spending on expanding manufacturing facilities. Now they have all of that excess capacity sitting around and it looks as though the bottom has fallen out of commodities. The reality is that there was never really that much demand. The Chinese were speculating.

So I don’t think that globalization is ending. I just don’t think that China is going to be able to export its way to wealth.